Past research on the debt ceiling
By Dylan Matthews,
As you'll know if you read Ezra and my primer on the subject, the debt ceiling has been around for the better part of the past century, and though it generally hasn’t caused much in the way of problems, it’s long been clear that it could cause problems, and as such, has attracted quite a lot of attention from academics. So here, in roughly chronological order, are the more interesting findings from the more interesting studies on the debt ceiling:
The debt ceiling arguably caused a recession in the '50s: In 1959, Marshall A. Robinson wrote
"The National Debt Ceiling: An Experiment in Fiscal Policy, "
a Brookings Institution monograph arguing that the debt ceiling, first introduced in 1917 and then in its modern form in 1941 (and only increased once between then and the book's writing), had not only failed, but backfired.
The book is long since out of print, but according to this contemporary review in the Journal of the American Statistical Association by Fred Weston of UCLA, Robison points to an incident in 1957, when the Air Force had to stop paying its bills because of the debt ceiling. This led to a sudden $8 billion (1.7 percent of GDP) fall in defense spending, which Robinson credits with the 1957-58 recession. This in turn led to a fiscal year 1959 deficit of $12.4 billion, further suggesting that austerity measures that hurt growth don't end up cutting deficits either.
It helped create the congressional budget process: An anonymous Harvard Law Review note, "Impoundment of Funds", from 1973 details that year's debt ceiling fight. The debt ceiling was $465 billion, and the debt was set to hit that level in the summer. Nixon thus chose to have his OMB "impound," or refuse to spend, $3.4 billion in funds appropriated by Congress. He claimed that this was legally required to avoid the debt ceiling. The note argues that Nixon's reasoning was incorrect and that the US could have stayed below the debt ceiling for longer without resorting to impoundment. Nixon’s use of impoundment was one of the assertions of executive power that led to the Congressional Budget and Impoundment Control Act of 1974, which established the Congressional budget process, created the Congressional Budget Office and sought to limit the president's powers in the wake of Watergate.
The US defaulted once before, and it was bad: Via Donald Marron, this 1989 paper by economists Terry Zivney and Richard Marcus describes a default that occurred in 1979 in the aftermath of Congressional debate over the debt ceiling. Computer malfunctions led to $122 million in Treasury payments being delayed, which meets the technical definition of default. The result was a 0.6 percent permanent increase in interest rates, which resulted in $12 billion in additional annual debt payments. You can read more in Brady Dennis' story about the Zivney/Marcus study here.
Debt limit fights have gotten more partisan: In this 1993 study in Public Administration Review, political scientists Linda K. Kowalcky and Lance T. LeLoup find that debates about the debt ceiling grew steadily more partisan from the '50s to the '90s.
President Eisenhower consistently wanted increases in the limit and found Democratic members of Congress more willing to work with him than Republicans. Republicans maintained their opposition to increases in the debt ceiling through the Kennedy and Johnson administrations, though Senate Republicans were more split on the issue than those in the House, who consistently voted against increasing the limit. In the Nixon administration, both the White House and members of Congress started to use the debt limit to demand policy concessions, including on largely unrelated issues like military operations in Cambodia.
Budget reforms in 1974 sought to deter deficit spending by making sure debt limit votes took place before budget votes, thus pressuring members to not vote for unbalanced budgets, but the change didn't create the desired effect as Congress continued to pass unbalanced budgets. The issue remained partisan through the Carter and Reagan administrations, with House Republicans under Carter and Senate Democrats under Reagan consistently voting against increasing the debt limit, though House Republicans opposed increases under Reagan as well. Members of Congress consistently tried to add non-related amendments to debt limit bills under Carter and Reagan, though this practice tapered off toward the end of Reagan's term and during the first Bush administration.
The 1995-6 debt limit battle raised interest rates on Treasuries: A 2001 study by economists Srinivas Nippani, Pu Liu and Craig T. Schulman studied the effect of the 1995-96 fight between President Clinton and Congress over raising the debt ceiling affected interest rates on Treasuries. On November 9, 1995, the White House announced that default was near if the ceiling was not increased. Eventually, both Standard & Poor's and Moody's announced they were ready to downgrade US debt, while Treasury Secretary Robert Rubin announced he would be forced to default if the ceiling were not raised before March. Congress eventually relented and the ceiling was raised on March 28. Nippani, Liu, and Schulman find that the market started to charge a "default risk premium" on three-month and six-month Treasury bills during the crisis, but that T-bill rates returned to normal when the crisis had passed.
This debate is breaking all our assumptions: In 2005, law professor Anita Krishnakumar wrote a defense of the debt limit in the Harvard Journal on Legislation. Krishnakumar's arguments for the limit are familiar — that it encourages balanced budgets, is a meaningful Congressional check on presidential power, and that it is a rare vote unaffected by interest group politics — but her rebuttals of arguments against the limit are especially interesting — and, it turns out, evidence of how dramatically different today’s debt-ceiling debates are from yesterday’s.
She calls the idea that legislators would seek to tie debt ceiling increases to other policy changes "the legislative pawn myth," and counters the argument that the limit could threaten the credit of the United States by asserting that "the nation never once has defaulted on its obligations" since the limit was enacted. In fairness, Krishnakumar also urges procedural changes, such as banning non-germane amendments to debt ceiling bills, to avoid the ceiling been used as a pawn, and she was correct that, historically, successful attempts to tie debt ceiling increases to other policies have been rare. But the fact that things now taken as obvious — that the debt ceiling will be used as a pawn and that its existence creates a real risk of default — were considered implausible just six years ago is revealing about how much debt ceiling fights have escalated in that time.
For more: This paper, by the Congressional Research Service, includes a complete history of the debt ceiling and the times it has been raised, with a focus on debates during the last decade.